1/25-1/29/16 Charts of the Week

What a week it was for equities, which trended down through Thursday’s close only to be saved by the Bank of Japan’s decision to implement negative interest rates on bank deposits exceeding reserve requirements. The Russell 2000 squeezed out a gain of just over .5% and the S&P 500 gained slightly more than 1% on the news.

While this announcement was certain to cause a stir in the markets, it will likely be a short lived economic event. Market tops and bottoms are typically a process rather than an event, and bear markets typically see brief bounces as they trend lower, which can be inspired by events like this. Putting the announcement from the BOJ aside, the economic fundamentals remain the same as they have for the past 2 quarters that have led to the selloff in equities; manufacturing is weak, which has hurt the transportation industry, and every major indicator shows headwinds for economic growth.

Asset-classes

As you can see, funds have been fund flows have been net negative for both equities and all fixed income instruments since the 2nd week of December, 2015. What is most interesting is that while these funds are flowing out of equities, they are not flowing in to fixed income at a similar pace. This shows that investors are likely parking their money in cash, waiting to decide what their next move will be. The S&P 500 (as of 1/22/16) reflects the pain caused by redemptions in 2016.

sectors

The story continues to be oil prices, which surged to $33.58/barrel from $29.50/barrel last week. Many investors feel that cheap oil prices must be catastrophic to the entire energy sector. This unsupported claim is untrue. While cheap energy can hurt energy producers, as evidenced by the abysmal Dallas Fed Manufacturing Numbers…

dallas-fed

There is typically a lag in prices of energy traded in the commodities markets and what consumers pay at the pump. Kudos to CNBC for producing a unique visual that shows how gasoline prices fall subsequent to crude oil prices, and refiners can reap major margins in that time.

cheap-oil

Those margins can do wonders for the stock prices of both refining companies and firms in the energy marketing arena…

middlemen

We have been closely watching the biotech sector as well, a sector of the markets that were once a bright spot, have been outperformed by the broader market in 2016…

biotechs

We have mentioned in the past that markets tend to work in cycles, cycles which typically last about 7-8 years. If you look at a chart of the NASDAQ biotechnology index, biotech stocks have performed miraculously well since the 2008 crash, and have lost about 40% of their value since summer of 2015. A correction in the sector was inevitable, and frankly is not surprising. That sector provides a stark reminder than when times are good, they are great, but when markets turn, they can turn quickly, and violently…

Coming off of lows can provide unique opportunities. When we see how depressed prices are in the energy and commodities sectors, we feel that there will be numerous value buys for investors in the near term, but not for the faint of heart.

sp500-companies

The last 3 charts show the Dow Jones Transportation index (the Dow Jones for shipping companies)…

DJT-1

The Freight Transportation Services Index…

transport-services-index

And finally the ACT For-Hire Trucking Survey…

truck-sales

All three of these charts say the same thing to us…manufacturing is declining, and thus the demand for shipping is declining. I don’t care what industry you are in, if people are not buying your product or service, you will have an economic contraction, and that is what these indexes are spelling out for us…significant weakness.

Investors will wait out the weekend with baited breath to see how the markets react to the Bank of Japan announcement. In the mean time, if you have any questions about our services, please do not hesitate to give us a call at 1-800-624-5597 to hear more about what we see coming in 2016.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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